Monetary Policy Rules for Managing Aid Surges in Africa

42 Pages Posted: 23 Aug 2007

See all articles by Christopher Scott Adam

Christopher Scott Adam

University of Oxford

Stephen A. O'Connell

Swarthmore College - Economics Department; University of Oxford - Centre for Study of African Economics

Edward F. Buffie

Indiana University Bloomington - Department of Economics

Catherine A. Pattillo

International Monetary Fund (IMF) - Research Division

Multiple version iconThere are 2 versions of this paper

Date Written: July 2007

Abstract

Since the turn of the century, aid flows to Africa have increased on average and become more volatile. As a result, policymakers, particularly in post-stabilization countries where inflation has only recently been brought under control, have been increasingly preoccupied with how best to deploy the available instruments of monetary policy without yielding on hard-won inflation gains. We use a stochastic simulation model, in which private sector currency substitution effects play a central role, to examine the properties of alternative monetary and fiscal policy strategies in the face of volatile aid flows. We show that simple monetary rules, specifically an (unsterilized) exchange rate crawl and a 'reserve buffer plus float'-under which the authorities set a time-varying reserve target corresponding to the unspent portion of aid financing and allow the exchange rate to float freely once this reserve target is satisfied-have attractive properties relative to a range of alternative strategies including those involving heavy reliance on bond sterilization or a commitment to a 'pure' exchange rate float.

Keywords: Working Paper, Development assistance, Monetary policy, Africa, Economic models

Suggested Citation

Adam, Christopher Scott and O'Connell, Stephen A. and Buffie, Edward F. and Pattillo, Catherine, Monetary Policy Rules for Managing Aid Surges in Africa (July 2007). IMF Working Papers, Vol. , pp. 1-40, 2007. Available at SSRN: https://ssrn.com/abstract=1007929

Christopher Scott Adam

University of Oxford ( email )

Oxford
United Kingdom

Stephen A. O'Connell

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States
610-328-8107 (Phone)
610-328-7352 (Fax)

HOME PAGE: http://www.swarthmore.edu/SocSci/soconne1/

University of Oxford - Centre for Study of African Economics

Wellington Square
Oxford OX1 3JP
United Kingdom

Edward F. Buffie

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall 105
107 S. Indiana Avenue
Bloomington, IN 47405-7000
United States
812-855-4848 (Phone)

Catherine Pattillo

International Monetary Fund (IMF) - Research Division ( email )

700 19th Street NW
Washington, DC 20431
United States

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